JPMorgan: 10.4% Unemployment Coming This Friday

The granddaddy of economic reports is out this Friday - the monthly jobs report. Consensus is looking for another large loss of -100K jobs and a steady unemployment rate at 10.2%. This would market a dramatic improvement over last month's -219K. Last months report showed some tepid signs of strength as temp work gained 34K. This is generally viewed as a leading indicator.

Yesterday's ADP report is expecting a -169K drop in jobs. This report has not proven to be a good predictor of payrolls over the last few years, but the large discrepancy could be a sign that analysts are a bit too optimistic with regards to payrolls. The Challenger job cut report also showed some mixed signals yesterday. Total layoff intentions slipped to 50K from 181K last November. On the downside, total hiring intention was just 10K compared to Octobers 57K. While the pace of firings might be slowing we're by no means seeing a massive pick-up in hiring.

We expect that nonfarm employment declined 100,000 in November, compared to a drop of 190,000 in October and an average decline of 188,000 over the last three months. We also expect that the unemployment rate rose to 10.4% from 10.2%.

claims fell by 394,000. Moreover, initial jobless claims have declined by 108,000 over the last 13 weeks. A surprisingly weak industry in October was manufacturing (-61,000), and this could be an area where we see more moderate job losses in November. Manufacturing surveys have pointed to better numbers—the ISM employment index hit 53.1 by October—and we forecast a 30,000 drop in November.

Earnings and hours: We expect a soft 0.1%m/m gain in average hourly earnings, which is consistent with the level of slack in the labor market. We also anticipate an increase in the workweek to 33.1 hours from 33.0.

Payrolls: Employment figures have been disappointing in recent months. We had been expecting that payroll losses would moderate, but employment declines have actually hovered in a narrow range for the last three months. This has been especially surprising given that initial jobless claims have fallen steadily over this period. While jobless claims are by no means a perfect guide to employment changes, their steady fall does suggest that employment losses should soon moderate. Initial jobless claims fell by 30,000 between the October and November household survey weeks, and continuing jobless

Unemployment: The household survey, from which the unemployment rate is calculated, has recently shown larger job losses than the establishment survey. The household survey is typically much more volatile than the establishment survey and is considered less reliable when looking at short-term employment changes. Nonetheless, the horrible numbers coming from the household survey have been worrying, and we would hope to see it converge toward the establishment survey soon. A rise in the unemployment rate to 10.3% from 10.2% is consistent with our employment estimate of -100,000, but we believe a rise to 10.4% is actually more likely. The reason is that labor force participation has fallen rapidly in recent months, and there is the possibility that it will bounce back. The participation rate went from 65.5% in August to 65.1% in October, its lowest level since 1986.

Even with a potential downside surprise I don't expect the market to respond too negatively. There is light at the end of the jobs tunnel and I fully expect the economy to move into job creation some time early next year. For now, the market is likely to continue focusing on that point in time. A 10.4% unemployment rate could certainly cause a near-term sell-off, but I doubt the dip-buyers will shy away from the opportunity to pile into equities again. These reports are going to have less psychological impact on the market until they begin to turn positive. Only then will the truly heavy lifting begin.